The financial crisis in Greece has been building for several years. In 2009, it recorded its first fall in gross domestic product since 1993, and suffered rising unemployment and low international competitiveness. Government spending continued to rise rapidly. By 2010, Greece’s public debt was estimated at about 140% of GDP, rising to 160% in mid 2011. The country also has a very high fiscal deficit, estimated at 15% of GDP, and a large trade deficit. Greece is trying to avoid default and suffers ongoing recession and an unemployment rate of 16%. The financial crisis may have a serious impact on the global economy.

Greece is a part of the Eurozone and uses the same currency, the euro, as the other 16 member countries. Its current high level of debt, fiscal deficit and political instability has caused a downgrading in its credit rating to “junk” status, leading to falls in stock market prices around the world. Uncertainty as to whether Greece can pay its debts has resulted in a hefty increase in the rates of interest it has to pay on its borrowings. The rate on Greek two year government bonds has risen from about two percent in mid 2009 to 10 percent in mid 2010 to 26 percent and higher in mid 2011. This only serves to increase the level of debt.

The situation in Greece has contributed to investor nervousness in other euro area countries, particularly Ireland, Portugal, Spain, Belgium, and now perhaps Italy. These countries are already having their own problems with debt and financial stability. Most other European countries also have high debt. Germany is an exception but is worried because it has a large volume of outstanding loans with Greece and other high debt countries.

The high risk of default by Greece places upward pressure on interest rates in other countries as lenders demand a premium. This reduces demand in these countries. It also takes savings away from more productive investments in manufacturing, services, infrastructure, tourism, and so on. The economies of these other European countries would therefore be worse off than otherwise. Their lower exports and imports mean that their trading partners are worse off too.

Some commentators feel that the global economy would be better off if Greece, and perhaps Ireland, defaulted on their debt, favoring a controlled default or restructuring of debt as the best solution. Greece poses a major threat to the European banks and financial system. Uncertainty stifles financial markets and the best way to reduce or eliminate the uncertainty might be for Greece to default. An alternative would be for Greece to leave the Eurozone and devalue its currency. This would be likely to keep the markets and the banks relatively happy too.

The Greek situation has implications for countries beyond Europe. Financial markets are global by nature, with funds shifting quite freely between countries these days. Stock markets around the world have reacted to Greece’s financial situation and this affects investor and consumer confidence. Countries such as the US, UK and Japan have their own economic, financial and debt problems and these are not helped by what is happening in Greece.

Trading partners of Greece will suffer because of its debt situation. With an increasing level of funds pumped into servicing debt and pushing up interest rates, the rest of the economy suffers, including exports and imports. Greek exports have fallen from $29.1 billion in 2009 to $21.3 billion in 2010 and are predicted to be $21.1 billion in 2011. Main export partners are Germany, Italy, Cyprus, Bulgaria, US and UK. Imports have declined even further, from $93.9 billion in 2009 to $64.2 billion in 2010 and an estimated $44.9 billion in 2011. Major import partners are Germany, Italy, China, France, Netherlands and South Korea. Thus all these countries have suffered a fall-off in trade with Greece.

A positive impact on the world economy that should come out of the financial crisis in Greece is lessons to be learned from taking on too much debt. Many countries around the world have pushed their debt levels up to support their desire for greater consumption and higher living standards. They are now paying the price. They are also seeing the turmoil in Greece when debt levels are pushed over the edge and the populace have to pay with draconian cuts in government spending and services and an ongoing recession.